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Limits of Ideological Economics

Paul Krugman is continuing his discussion of the legacy of Milton Friedman with a discussion of why conservative economists—many of them great at the science itself—are resistant or even impervious to contrary information. This round started with yet another terse and impenetrable Brad DeLong article that Krugman helpfully translated into English.[1] The observation has two parts. First, in the 1960s, Friedman predicted the stagflation of the 1970s. As a result of this, “liberal”[2] (mostly Keynesian) economists took note of this and changed how they looked at the economy. Second, in the 1990s, Krugman predicted the liquidity trap of the late naughts. As a result of this, conservative economists have largely refused to rethink how they look at the economy. Instead they just come up with excuses as to why the data don’t show what the the data very clearly do show.

Krugman proposes two reasons why there is this asymmetry. First, as I have argued, it is that the conservative economists are in love with their computer models. I know about this. When I was in the academy, I wrote very big computer models of the environment. It is very easy to think that the model is more real than the system that it models. I have even heard scientists complain that some phenomenon cannot be happening purely because their model does not allow it. It is sad, but very understandable. And given that the efficient market models are very complex, they can easily become and end in themselves. Krugman suggests that the economists who use this kind of theory find it comfortable and hard to give up.

His second reason is more to the point however: politics. He notes that while there is nothing particularly liberal about Keynesianism, monetarism is most definitely conservative. Krugman is being much more blunt than people normally are in polite company. But I want to take it further (no one would ever mistake me for polite company). The conservative economists are not really doing what I consider science. Science starts with data and leads to theory. I don’t see that from Friedman and other conservative economists. To me they are looking only for theories that will further their ideological prejudices.

Look at what happened in the 1970s which led to, as Krugman puts it, “Friedman’s promotion to demigod status.” After that, the conservative “fresh water” community did not celebrate that Keynes’ theory had been expanded. Not at all! They celebrated that Keynes had been destroyed. Can you imagine if Einstein had gone around scoffing at Galileo? Of course you can’t because Einstein was a scientist who was building on the work of Galileo. I can’t say for sure that Friedman did or did not look that way at Keynes. But it certainly seems that Robert Lucas did. And so did most of the louder voices in the movement.

Over the past few years, I’ve heard lots of garbage from these kinds of thinkers. One of the most annoying is the idea that government stimulus spending can’t help the economy because of Ricardian Equivalence. This is a very old theory that if the government borrows money to stimulate the economy, the tax payers will just cut their spending, because they know that they’ll have to be taxed to pay for the government spending. There are a couple of problems with it. First, even if it is true, who says that the money spent this year will need to be paid back right away? Couldn’t that money be paid off over ten years and thus the stimulus would work? Second, really?! Do people really behave this way? I just don’t see it.

The point is that there really should be no question that stimulus works. The data are overwhelming. But conservative economists reach very far to come up with theories to justify what they want to believe. I’m not claiming that they aren’t smart, because clearly they are. But ideology blinds them to the point where they can only find certain kinds of results. In the case of Friedman, this probably helped him to look at the economy in a different way. But right now, it is blinding them. It reminds me of Obamacare. It came from the Heritage Foundation. Clearly the people who came up with it were smart. They had to be! They ruled out at the start the most obvious healthcare solutions that were all working well throughout the developed world.

So conservative economics can be useful but in the long run all of its proponents will turn out to be minor figures. History will see them for the ideological apologists that they were (and are). The question for us today is how long we are going to allow our politicians (conservative and liberal alike) to use their apologetics to avoid doing the right thing.

[1] The problem is not that DeLong uses jargon, although sometimes he does. It is just that he assumes that everyone knows what he knows and he doesn’t work at clarifying what he’s getting at. Some have leveled the same criticism at me.

[2] The reason I put “liberal” in quotes is that what is today considered “liberal economics” is really not ideological; it is just science.

About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.